UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-2745
SOUTHERN NATURAL GAS COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 63-0196650
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
AMSOUTH-SONAT TOWER
BIRMINGHAM, ALABAMA 35203
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (205) 325-7410
NO CHANGE
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No _
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
COMMON STOCK, $3.75 PAR VALUE:
1,000 SHARES OUTSTANDING ON OCTOBER 31, 1996
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION
H(1) (a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH
THE REDUCED DISCLOSURE FORMAT.
<PAGE>
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
<S> <C>
Page No.
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
(Unaudited)--September 30, 1996 and
December 31, 1995 1
Condensed Consolidated Statements of Income
(Unaudited)--Three Months and Nine Months Ended
September 30, 1996 and 1995 2
Condensed Consolidated Statements of Cash Flows
(Unaudited)--Nine Months Ended
September 30, 1996 and 1995 3
Notes to Condensed Consolidated Financial
Statements (Unaudited) 4 - 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8 - 14
PART II. Other Information
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
(In Thousands)
ASSETS
Current Assets:
<S> <C> <C>
Cash $ 1,800 $ 711
Notes receivable, primarily from affiliates 40,972 103,845
Accounts receivable 93,949 118,542
Inventories 27,416 21,625
Gas imbalance receivables 16,054 15,919
Federal and state income taxes 17,134 13,160
Other 22,393 25,835
---------- -------
Total Current Assets 219,718 299,637
-------- --------
Investments in Unconsolidated Affiliates and Other 52,030 49,535
------- -------
Plant, Property and Equipment 2,398,402 2,315,003
Less accumulated depreciation and amortization 1,532,312 1,504,087
---------- ----------
866,090 810,916
-------- --------
Deferred Charges and Other:
Gas supply realignment costs 21,115 199,073
Other 80,119 78,548
---------- -------
101,234 277,621
-------- --------
$1,239,072 $1,437,709
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Long-term debt due within one year $ 6,964 $ 6,964
Notes payable to affiliates - 14,981
Accounts payable 47,207 56,787
Accrued state income taxes - 1,856
Accrued interest 14,274 15,404
Gas imbalance payables 14,020 17,196
Other 20,269 17,258
---------- -------
Total Current Liabilities 102,734 130,446
-------- --------
Long-Term Debt 310,856 317,627
-------- --------
Deferred Credits and Other:
Deferred income taxes 124,492 80,956
Reserves for regulatory matters 14,358 181,798
Other 82,713 152,784
---------- --------
221,563 415,538
-------- --------
Commitments and Contingencies
Stockholder's Equity:
Common stock and other 100,673 100,616
Retained earnings 503,246 473,482
-------- --------
Total Stockholder's Equity 603,919 574,098
-------- --------
$1,239,072 $1,437,709
========== ==========
</TABLE>
See accompanying notes.
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
(In Thousands)
Revenues:
<S> <C> <C> <C> <C>
Natural gas sales $ 39,784 $ 44,884 $154,372 $138,820
Transportation and storage 89,415 88,155 273,250 282,606
Other 13,034 41,475 180,786 63,242
-------- -------- -------- --------
142,233 174,514 608,408 484,668
-------- -------- -------- --------
Costs and Expenses:
Natural gas cost 39,197 44,729 151,154 137,128
Transition cost recovery 7,309 32,259 160,445 40,665
Operating and maintenance 24,646 23,238 66,916 63,538
General and administrative 18,857 20,507 58,890 61,089
Depreciation and amortization 11,316 12,257 36,110 39,781
Taxes, other than income 4,716 4,761 14,029 14,895
------ -------- ------- --------
106,041 137,751 487,544 357,096
-------- -------- -------- --------
Operating Income 36,192 36,763 120,864 127,572
Other Income (Loss), Net:
Equity in earnings of
unconsolidated affiliates 2,341 2,319 7,236 7,161
Other 4,861 269 5,750 371
-------- -------- ------ --------
7,202 2,588 12,986 7,532
------ -------- ------- --------
Interest:
Interest income, primarily
from affiliates 1,311 1,783 4,566 6,707
Interest expense (8,401) (10,663) (30,696) (31,624)
Interest capitalized 303 64 599 165
---- -------- ---- --------
(6,787) (8,816) (25,531) (24,752)
------- -------- -------- --------
Income before Income Taxes 36,607 30,535 108,319 110,352
Income Taxes 13,729 11,730 41,356 42,447
------- -------- ------- --------
Net Income $ 22,878 $ 18,805 $ 66,963 $ 67,905
======== ======== ======== ========
</TABLE>
See accompanying notes.
<PAGE>
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
1996 1995
(In Thousands)
Cash Flows from Operating Activities:
<S> <C> <C>
Net income $ 66,963 $ 67,905
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 36,110 39,781
Deferred income taxes 43,537 38,172
Equity in earnings of joint
ventures, less distributions (2,086) (2,911)
Reserves for regulatory matters (167,440) (6,330)
Gas supply realignment costs 182,325 (50,319)
Change in:
Accounts receivable 24,593 22,717
Inventories (5,791) (1,304)
Accounts payable (9,579) 1,055
Accrued interest and income taxes, net (8,167) (36,799)
Other current assets and liabilities 4,406 (8,002)
Other (74,806) (19,248)
------- --------
Net cash provided by operating
activities 90,065 44,717
------- --------
Cash Flows from Investing Activities:
Plant, property and equipment additions (94,900) (36,823)
Notes receivable, primarily from affiliates 62,872 37,477
Proceeds from disposal of assets and other 2,003 945
------ --------
Net cash provided by (used in)
investing activities (30,025) 1,599
-------- --------
Cash Flows from Financing Activities:
Payments of long-term debt (6,771) (5,960)
Changes in short-term borrowings (14,980) -
-------- ------
Net changes in debt (21,751) (5,960)
Dividends paid (37,200) (37,200)
-------- --------
Net cash used in financing activities (58,951) (43,160)
-------- --------
Net Increase in Cash 1,089 3,156
Cash at Beginning of Period 711 1,048
---- --------
Cash at End of Period $ 1,800 $ 4,204
======= ========
Supplemental Disclosures of Cash Flow Information
Cash Paid for:
Interest (net of amount capitalized) $ 22,173 $ 24,820
Income taxes, net 3,648 34,392
</TABLE>
See accompanying notes.
<PAGE>
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
Southern Natural Gas Company (Southern) is a wholly owned subsidiary of
Sonat Inc.
The accompanying condensed consolidated financial statements of Southern
and its subsidiaries have been prepared in accordance with the instructions to
Form 10-Q and include the information and footnotes required by such
instructions. In the opinion of management, all adjustments including those of a
normal recurring nature have been made that are necessary for a fair
presentation of the results for the interim periods presented herein.
Certain amounts in the 1995 condensed consolidated financial statements
have been reclassified to conform with the 1996 presentation.
2. Derivative Financial Instruments
Financial Risk - On January 22, 1996, Southern entered into a forward
rate agreement to hedge the interest rate risk of an anticipated future
borrowing under an existing shelf registration statement. The base 10 year
treasury rate for this future borrowing was hedged at approximately 5.78 percent
on a notional amount of $97 million. In September, due to revised expectations
of external financing requirements, 50 percent of the forward rate agreement was
liquidated resulting in a gain of $3.9 million. At September 30, 1996, the fair
market value of the remaining $48.5 million notional amount of this agreement
was approximately $3 million.
3. Unconsolidated Affiliates
A subsidiary of Southern owns 50 percent of Bear Creek Storage Company
(Bear Creek), an underground gas storage company. The following is summarized
income statement information for Bear Creek. No provision for income taxes has
been included since its income taxes are paid directly by the joint-venture
participants.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
(In Thousands)
<S> <C> <C> <C> <C>
Revenues $8,924 $8,885 $27,117 $27,113
Expenses:
Operating expenses 1,262 1,206 3,797 3,732
Depreciation 1,354 1,350 4,061 4,049
Other expenses, net 1,441 1,560 4,335 4,718
------ ------ ------ -------
Income Reported $4,867 $4,769 $14,924 $14,614
====== ====== ======= =======
</TABLE>
<PAGE>
4. Debt and Notes To and From Affiliates
Unsecured Notes - As part of Sonat's cash management program, Southern
regularly loans funds to or borrows funds from Sonat. Notes receivable and
payable are in the form of demand notes with rates reflecting Sonat's return on
funds loaned to its subsidiaries, average short-term investment rates and cost
of borrowed funds. In certain circumstances, these notes are subordinated in
right of payment to amounts payable by Sonat under certain long-term credit
agreements. For cash management purposes, in September, Southern began borrowing
from its subsidiaries in order to eliminate the loan from its parent.
Southern has available short-term lines of credit of $50 million for a
period of 364 days. Borrowings are available through May 27, 1997, and are in
the form of unsecured promissory notes that bear interest at rates based on the
banks' prevailing prime, international or money-market lending rates. At
September 30, 1996, no amounts were outstanding.
5. Commitments and Contingencies
Rate Matters - Periodically, Southern and its subsidiaries make general
rate filings with the Federal Energy Regulatory Commission (FERC) to provide for
the recovery of cost of service and a return on equity. The FERC normally allows
the filed rates to become effective, subject to refund, until it rules on the
approved level of rates. Southern and its subsidiaries provide reserves relating
to such amounts collected subject to refund, as appropriate, and make refunds
upon establishment of the final rates. At September 30, 1996, Southern's rates
are established by the Customer Settlement and a FERC order effective for
parties contesting the Customer Settlement and are not subject to refund (see
discussion below).
Customer Settlement - In 1992 the FERC issued its Order No. 636 (the
Order). The Order required significant changes in interstate natural gas
pipeline services. Interstate pipeline companies, including Southern, are
incurring certain costs (transition costs) as a result of the Order, the
principal one being costs related to amendment or termination of, or purchasing
gas at above-market prices under, existing gas purchase contracts, which are
referred to as gas supply realignment (GSR) costs.
In an order issued on September 29, 1995, (the Settlement Order), the
FERC approved a comprehensive settlement (the Customer Settlement) that Southern
had filed on March 15, 1995. The Customer Settlement, which is effective as to
all Southern's customers, except one customer representing approximately 2
percent of the firm transportation capacity on Southern's system, resolved all
of Southern's previously pending rate proceedings and proceedings to recover GSR
and other transition costs associated with the implementation of Order No. 636.
The four major rate cases resolved by the Customer Settlement cover consecutive
periods beginning September 1, 1989. In May 1996, the Settlement became final
and Southern credited in the aggregate the full amount of Southern's rate
reserves as
<PAGE>
5. Commitments and Contingencies (Cont'd)
of February 28, 1995, plus interest, less certain amounts withheld for potential
refunds to contesting parties, to reduce the GSR costs borne by Southern's
customers. The total credit recorded in May 1996 amounted to $164 million.
Southern implemented reduced settlement rates effective March 1, 1995. The
Customer Settlement provides that, except in certain limited circumstances,
Southern will not file a general rate case to be effective prior to March 1,
1998. The Settlement also provides for Southern to recover $363 million of GSR
costs incurred or reserved as of September 30, 1996, and 50 percent of future
GSR costs that Southern may incur thereafter, which future costs the Company
believes will not be material to its financial position or results of
operations.
Several parties that opposed the Customer Settlement had filed with the
FERC requests for rehearing of the Settlement Order. On April 11, 1996, the FERC
denied those requests for rehearing of the Settlement Order and also decided
certain issues in prior rate proceedings that affect the contesting parties to
the Customer Settlement (April 11 Order). Pursuant to the April 11 Order,
Southern made refunds to the contesting parties in May 1996 covering various
rate periods from January 1, 1991, through December 31, 1995. Southern was
adequately reserved for these refunds. The only issues remaining to be litigated
at the FERC by the one remaining contesting party concern the recoverability of
certain GSR and other transition costs under Order No. 636, which would not be
material even if such issues were determined adversely to Southern. The
contesting party, and one other entity that may potentially compete with
Southern in providing storage services, have each appealed the April 11 Order
and the Settlement Order to the D.C. Circuit Court of Appeals. Although there
can be no assurances, the Company believes that the Settlement Order and the
April 11 Order should be upheld on appeal.
Sea Robin - In January 1995, Sea Robin Pipeline Company, a subsidiary of
Southern, filed with the FERC a petition for a declaratory ruling that the Sea
Robin pipeline system is engaged in the gathering of natural gas and is,
therefore, exempt from FERC regulation under the Natural Gas Act. In June 1995,
the FERC denied Sea Robin's petition on the basis that the primary function of
the Sea Robin system is the interstate transportation of gas. Sea Robin's
request for rehearing of that ruling was denied by the FERC on June 26, 1996.
Sea Robin filed on August 15, 1996, for judicial review of the orders denying
its petition.
Following the filing of Sea Robin's petition for a gathering exemption,
several of the shippers on the Sea Robin system filed with the FERC in February
1995 a complaint against Sea Robin under Section 5 of the Natural Gas Act
claiming that Sea Robin's rates are unjust and unreasonable. In its answer, Sea
Robin asked the FERC to dismiss the complaint or to find that its rates continue
to be just and reasonable based on the data it presented. On July 31, 1996, the
FERC issued an order on the complaint, instituting an
<PAGE>
5. Commitments and Contingencies (Cont'd)
investigation and hearing under Section 5 of the Natural Gas Act. Sea Robin is
unable to predict the outcome of this proceeding, but any reduction in Sea
Robin's rates as a result of this complaint can be implemented only on a
prospective basis and any such change is not expected to be material to the
Company's financial position or results of operations.
Gas Purchase Contracts - Southern currently is incurring no take-or-pay
liabilities under its gas purchase contracts. Southern regularly evaluates its
position relative to gas purchase contract matters, including the likelihood of
loss from asserted or unasserted take-or-pay claims or above-market prices. When
a loss is probable and the amount can be reasonably estimated, it is accrued.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
SOUTHERN NATURAL GAS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The principal business of Southern and its subsidiaries is the
interstate transmission of natural gas in the southeastern United States, which
is regulated by the FERC.
Southern continues to pursue opportunities to expand its pipeline system
in its traditional market area and to connect new gas supplies. Southern filed
an application on January 24, 1996, with the FERC seeking approval to expand its
pipeline system to provide firm gas transportation service to three existing
customers and to two new customers in North Alabama. The proposed
76-million-cubic-feet-per-day expansion is supported by long-term firm
transportation agreements, including the cities of Huntsville and Decatur, which
have executed 20-year service agreements for 40 million cubic feet per day and
25 million cubic feet per day, respectively. The $53 million project includes
118 miles of new pipeline and additional compression on Southern's existing
system. The earliest in-service date for the proposed expansion, which requires
FERC approval, would be November 1997. The company that currently provides
transportation service to the cities of Huntsville and Decatur has challenged
this project in Alabama state court and with the FERC.
In May 1996, Southern filed an application with the FERC to expand its
pipeline system in Zone 3 of its market area. This $36 million expansion will
enable Southern to provide additional firm transportation services totaling 46
million cubic feet per day to 11 customers in Georgia and Tennessee. If FERC
approval is received, the in-service date for this firm transportation service
is expected to be November 1997.
In 1996, Southern formed Destin Pipeline Company Inc., a wholly owned
subsidiary. Destin filed an application with the FERC seeking authorization to
construct, own, and operate a large-diameter interstate pipeline system to
transport approximately one billion cubic feet of gas per day from the deepwater
and corridor areas being developed in the eastern Gulf of Mexico for delivery to
pipeline interconnections in central Mississippi. The estimated capital cost of
the facilities is $294 million. Destin Pipeline has requested preliminary
regulatory approval for the project by January 1997 so that commercial
agreements can be entered into in early 1997. Engineering would be completed
during 1997, and construction would begin in 1998. The projected in-service date
is scheduled for January 1999. In addition to FERC authorization, Southern is
seeking, but does not yet have, contractual commitments to support the project.
<PAGE>
Operations
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
(In Millions)
<S> <C> <C> <C> <C>
Revenues:
Gas sales $ 39.8 $ 44.9 $154.4 $138.9
Market transportation and
storage 76.9 75.4 237.4 243.9
Supply transportation 12.5 12.7 35.8 38.6
Other 13.0 41.5 180.8 63.2
----- ------ ------ ------
Total Revenues 142.2 174.5 608.4 484.6
------ ------ ------ ------
Costs and Expenses:
Natural gas cost 39.2 44.7 151.2 137.1
Transition cost recovery 7.3 32.3 160.4 40.7
Operating and maintenance 24.6 23.2 66.9 63.5
General and administrative 18.9 20.5 58.9 61.1
Depreciation and amortization 11.3 12.3 36.1 39.8
Taxes, other than income 4.7 4.8 14.0 14.9
---- ------ ----- ------
106.0 137.8 487.5 357.1
------ ------ ------ ------
Operating Income $ 36.2 $ 36.7 $120.9 $127.5
====== ====== ====== ======
Equity in Earnings of
Unconsolidated Affiliates $ 2.3 $ 2.3 $ 7.2 $ 7.1
===== ====== ===== ======
(Billion Cubic Feet)
Volumes:
Intrastate gas sales 2 1 6 5
Market transportation 133 143 483 448
--- --- --- ---
Total Market Throughput 135 144 489 453
Supply transportation 77 101 242 288
--- --- --- ---
Total Volumes 212 245 731 741
=== === === ===
Transition gas sales 16 21 51 70
=== === === ===
</TABLE>
Quarter-to-Quarter Analysis
Operating results for the third quarter of 1996 were relatively flat
compared with the prior year. Gas sales revenues and natural gas cost decreased
compared with the 1995 third quarter due to declining transition gas sales from
supply remaining under contract partially offset by higher prices. Both other
revenue and transition cost recovery in the 1995 period include a $17.7 million
adjustment related to the Customer Settlement. The adjustment did not impact
operating income. General and administrative expenses decreased due to lower
employee benefit expenses, including stock-based compensation. Depreciation and
amortization in the 1996 period includes a favorable $0.9 million adjustment
related to a change in the estimated life of leasehold improvements.
Year-to-Date Analysis
Operating results for the nine-month period decreased $6.6 million
primarily because incremental revenues from the sale of firm transportation
capacity were collected in the 1995 period prior to revised rates going into
effect on March 1, 1995. The 1995 period also included positive adjustments to
reflect actual interruptible transportation revenue and cost recovery in the
first year of post Order No. 636 operations and the reduction of a take-or-pay
liability.
Gas sales revenues and natural gas cost increased compared with the 1995
period reflecting higher gas prices on transition gas sales from supply
remaining under contract. Supply transportation revenues decreased due to lower
supply-area transportation volumes. Both other revenue and transition cost
recovery in the 1996 period include $163.9 million recorded as a result of
Southern's Customer Settlement becoming final. Depreciation and amortization
decreased in the 1996 period due to lower rates implemented March 1, 1995, and
the adjustments discussed in the preceding paragraph.
Natural Gas Sales and Supply
Sales by Southern of natural gas are anticipated to continue only until
Southern's remaining supply contracts expire, are terminated, or are assigned.
As a result of Order No. 636, Southern has terminated or renegotiated to market
pricing substantially all of its gas supply contracts through which it had
historically obtained its long-term gas supply. Some of the remaining contracts
contain clauses requiring Southern either to purchase minimum volumes of gas
under the contract or to pay for it (take-or-pay clauses). Although the cost of
gas under some of these contracts is in excess of current spot-market prices,
Southern currently is incurring no take-or-pay liabilities under any of these
contracts. Two market-priced contracts entered into with Exxon Corporation in
1995 as part of a settlement of certain other gas purchase contracts account for
92 percent and 85 percent in 1996 and 1997, respectively, of the purchase
commitments described below. Of such purchase commitments, the percent that is
priced in excess of current spot-market prices is 1 percent in 1996, 2 percent
in 1997, 8 percent in 1998, and substantially all of the volumes for years
thereafter. (See Note 5 of the Notes to Condensed Consolidated Financial
Statements for a discussion of price differential GSR costs.) Pending the
termination of these remaining supply contracts, Southern has sold a portion of
its remaining gas supply to a number of its firm transportation customers under
contracts that have been extended through November 30, 1997. The remainder of
Southern's gas supply will continue to be sold on a month-to-month basis.
<PAGE>
Southern's purchase commitments under its remaining gas supply contracts
for the remainder of 1996 and years 1997 through 2000 are estimated as follows:
Estimated
Purchase
Commitments
(In Millions)
1996 $ 72
1997 137
1998 22
1999 22
2000 19
These estimates are subject to significant uncertainty due both to the
number of assumptions inherent in these estimates and to the wide range of
possible outcomes for each assumption. None of the three major factors that
determine purchase commitments (underlying reserves, future deliverability and
future price) is known today with certainty.
See Note 5 of the Notes to Condensed Consolidated Financial Statements
for a discussion regarding Southern's rate proceedings to recover its GSR costs.
Rate Matters
The Customer Settlement resolves, as to all of Southern's customers
except one contesting party that represents approximately 2 percent of
Southern's firm transportation volumes, all of Southern's previously pending
rate proceedings and proceedings to recover GSR and other transition costs
associated with the implementation of Order No. 636. See Note 5 of the Notes to
Condensed Consolidated Financial Statements for a discussion of the Customer
Settlement and other rate matters.
<PAGE>
Other Income Statement Items
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
(In Millions)
<S> <C> <C> <C> <C>
Other Income-Other $ 4.9 $ 0.3 $ 5.7 $ 0.4
</TABLE>
The increase in Other in the 1996 periods compared to the same periods
in 1995 is attributable to the recognition of a $3.9 million gain on partial
termination of an interest rate swap and AFUDC-Equity associated with Southern's
pipeline expansion projects in the 1996 periods.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Interest:
Interest income $ 1.3 $ 1.8 $ 4.6 $ 6.7
Interest expense (8.4) (10.7) (30.7) (31.6)
Interest capitalized 0.3 - 0.6 0.1
---- --- ---- ----
$ (6.8) $ (8.9) $(25.5) $(24.8)
====== ====== ====== ======
</TABLE>
Net interest expense in 1996 decreased for the three-month period, but
increased slightly for the nine-month period. Interest income decreased in both
periods due to lower average balances of loans to affiliates. Interest expense
decreased in both periods due to lower average reserve balances in 1996. Partly
offsetting was an increase in interest expense in both 1996 periods related to
higher average debt levels with its parent.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Income Taxes $ 13.7 $ 11.7 $ 41.4 $ 42.4
</TABLE>
The change in income taxes in both periods was due to the change in
pretax income.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
1996 1995
(In Millions)
<S> <C> <C>
Operating Activities $ 90.1 $44.7
</TABLE>
Cash flow from operations increased $45.4 million compared to the 1995
period. The 1996 period had much lower GSR payments, primarily resulting from a
$45.0 million payment in February 1995. Slightly offsetting were net refunds to
customers, which were $15.0 million higher in the current period. In addition,
the current period includes a tax refund of $8.9 million while the 1995 period
includes the payment of $13.0 million related to prior period taxes. Operating
results were essentially level in both periods.
Other than the higher payments discussed above, the change in gas supply
realignment costs was attributable to the recording of the Customer Settlement
in the second quarter of 1996. The change in accounts payable is primarily
attributable to lower volumes of natural gas purchased in the current period.
The change in inventories is due to Southern's system expansions. The increase
in other current assets and liabilities is primarily attributable to the
amortization of operating prepayments in the current period. In addition, the
change in reserves for regulatory matters, and other is due to the settlement
accounting, which were essentially offsetting among these captions.
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
1996 1995
(In Millions)
<S> <C> <C>
Investing Activities $(30.0) $ 1.6
</TABLE>
Investing activities required $30.0 million of net cash in 1996 compared
to providing $1.6 million in 1995. Due to system expansions, capital
expenditures increased to $94.9 million in 1996 from $36.8 million in the 1995
period. Partly offsetting the increase in capital expenditures was a decrease in
Southern's loans to its parent (see Note 4 of the Notes to Condensed
Consolidated Financial Statements).
<TABLE>
<CAPTION>
<S> <C> <C>
Financing Activities $(59.0) $(43.2)
</TABLE>
Financing activities used $59.0 million in 1996 compared to $43.2 million
in 1995. The change was due to loan repayments by Southern to its parent in the
1996 period.
Capital Resources
At September 30, 1996, Southern had available $50 million under lines of
credit. Southern also has a shelf registration with the Securities and Exchange
Commission for up to $200 million in debt securities, of which $100 million has
been issued.
Southern expects to use cash from operations, borrowings in the public
or private markets or loans from affiliates to finance future capital or other
corporate expenditures.
FINANCIAL RISK MANAGEMENT
Southern faces exposure to financial market risks, primarily interest
rate risk. Use of derivatives to manage this risk is governed by a set of
policies approved by the Sonat Board of Directors. These policies prohibit
speculative transactions and require all counterparties to be approved by the
Board. In anticipation of a future borrowing, Southern has entered into a
forward rate agreement to hedge its interest rate risk (see Note 2 of the Notes
to Condensed Consolidated Financial Statements).
FORWARD LOOKING STATEMENTS
Disclosures provided in this Quarterly Report contain forward looking
statements regarding Southern's future plans, objectives, and expected
performance. These statements are based on assumptions that Southern believes
are reasonable, but are subject to a wide range of risks, and there is no
assurance that actual results may not differ materially. Realization of
Southern's objectives and expected performance can be adversely affected by the
actions of customers and competitors, changes in governmental regulation of
Southern's businesses, and changes in general economic conditions and the state
of domestic capital markets.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company reported in Item 5 of Part II of the Company's Report of
Form 10-Q for the quarter ended June 30,1996, that it is one of many defendants
in an action styled Jack J. Grynberg, et al. v Alaska Pipeline Company, et al.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits(1)
Exhibit
Number Exhibits
10 Amendatory Agreement dated August 23, 1996, to Service Agreement No.
902470 dated September 1, 1994, as amended March 1, 1995; No.
904460 dated November 1, 1994, as amended June 1, 1995; and Nos.
904461 and S20150 dated November 1, 1994, as amended March 1, 1995,
between Southern Natural Gas Company and Atlanta Gas Light Company,
filed as Exhibit 10 to Form 10-Q of Sonat Inc. for the quarter ended
September 30, 1996
12* Computation of Ratio of Earnings to Fixed Charges
27* Financial Data Schedules for the period ended September 30, 1996
- ------------
* Filed herewith
(b) Reports on Form 8-K
The Company did not file any report on Form 8-K during the quarter ended
September 30, 1996.
------------------- (1) The Company will furnish to requesting security
holders the exhibits on this list upon the payment of a fee of $.10 per page up
to a maximum of $5.00 per exhibit. Requests must be in writing and should be
addressed to R. David Hendrickson, Secretary, Southern Natural Gas Company, P.
O. Box 2563, Birmingham, Alabama, 35202-2563.
<PAGE>
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Southern Natural Gas Company
Date: November 7, 1996 By: /s/ Thomas W. Barker, Jr.
--------------------------- --------------------------
Thomas W. Barker, Jr.
Treasurer
(Principal Financial Officer)
Date: November 7, 1996 By: /s/ Norman G. Holmes
--------------------------- ---------------------
Norman G. Holmes
Vice President & Controller
(Principal Accounting Officer)
EXHIBIT 12
SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
Computation of Ratios of Earnings
from Continuing Operations to Fixed Charges
Total Enterprise (a)
<TABLE>
<CAPTION>
Nine Months Ended Sept 30, Years Ended December 31,
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings from Continuing Operations:
Income (loss) before income taxes $108,319 $110,352 $134,124 $ 76,098 $127,617 $126,691 $119,326
Fixed charges (see computation below) 34,733 36,349 49,679 48,385 59,171 49,131 46,596
------- -------- -------- -------- -------- -------- --------
Total Earnings Available for Fixed
Charges $143,052 $146,701 $183,803 $124,483 $186,788 $175,822 $165,922
======== ======== ======== ======== ======== ======== ========
Fixed Charges:
Interest expense before deducting
interest capitalized $ 33,049 $ 34,206 $ 46,859 $ 45,900 $ 56,599 $ 46,298 $ 42,957
Rentals(b) 1,684 2,143 2,820 2,485 2,572 2,833 3,639
------ -------- -------- -------- -------- -------- --------
$ 34,733 $ 36,349 $ 49,679 $ 48,385 $ 59,171 $ 49,131 $ 46,596
======== ======== ======== ======== ======== ======== ========
Ratio of Earnings to Fixed Charges 4.1 4.0 3.7 2.6 3.2 3.6 3.6
==== ======== ======== ======== ======== ======== ========
</TABLE>
- ----------------
(a) Amounts include the Company's portion of the captions as they relate to
persons accounted for by the equity method.
(b) These amounts represent 1/3 of rentals which approximate the interest
factor applicable to such rentals of the Company and its subsidiaries and
continuing unconsolidated affiliates.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,800
<SECURITIES> 0
<RECEIVABLES> 93,949
<ALLOWANCES> 0
<INVENTORY> 27,416
<CURRENT-ASSETS> 219,718
<PP&E> 2,398,402
<DEPRECIATION> 1,532,312
<TOTAL-ASSETS> 1,239,072
<CURRENT-LIABILITIES> 102,734
<BONDS> 310,856
0
0
<COMMON> 4
<OTHER-SE> 603,915
<TOTAL-LIABILITY-AND-EQUITY> 1,239,072
<SALES> 154,372
<TOTAL-REVENUES> 608,408
<CGS> 151,154
<TOTAL-COSTS> 378,515
<OTHER-EXPENSES> 36,110
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,097
<INCOME-PRETAX> 108,319
<INCOME-TAX> 41,356
<INCOME-CONTINUING> 66,963
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 66,963
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
